Investing in property has long been a popular way to build wealth in Australia. While many own homes or investment properties in their names, a growing trend sees Aussies buying through companies.
This approach offers both potential benefits and drawbacks, which we’ll explore here. Weighing the pros and cons can help you decide if buying through a company is right for you.
What do we mean by a company investing in property?
Companies buying real estate is a common practice.
You might be surprised to know that McDonald’s, famous for its burgers, actually focuses more on buying and selling properties.
In Australia, the ATO gives various tax breaks to encourage people to invest in property. These are generally well-known.
But, it’s less known that there are also benefits for companies buying property.
Interested in this? Our article about how to start a company for property investment offers more information.
Pros of Buying Property Through a Company
Here’s a quick snapshot of the Pros :
| Pros | Details |
|---|---|
| Tax Deductions | Enhanced tax benefits |
| Reduced Capital Gains Tax | Lower tax on profits |
| Positive Gearing Benefits | Lower taxes on rental income |
| Profit Distribution | Tax savings through profit sharing |
| Limited Liability | Protection of personal assets |
Let’s explore each of them in more detail.
Tax Deductions
One of the major benefits of your company buying a property is that you can enjoy some attractive tax deductions.
By purchasing something through your business, you will be able to arrange both high mortgage and rental repayments.
This enables you to pay off the mortgage much more quickly. It also allows you to keep rent payments just below the required rate of mortgage repayments, which will allow you to facilitate negative gearing.
By doing this, you will be able to reduce the amount of income tax you will have to pay on account of your company structure.
Reduced Capital Gains Tax
Whenever you buy or sell a property as an individual, any capital gain you make counts as taxable income. Therefore, you will need to pay capital gains tax on it.
As an individual, you are subject to a handful of discount exemptions. However, if buying as a company, there are several more open to you.
“If the property is specifically used for business, the amount required to pay for capital gains tax reduces by 50%. “
Additionally, if you keep the property for at least 15 years or are selling it due to permanent incapacitation or retirement, you may enjoy an exemption from paying capital gains tax at all.
Benefits of Positive Gearing
When the rent you earn from a property is more than your mortgage payments, it’s called positive gearing.
If a company buys a property and it’s positively geared, the company pays less tax compared to an individual owner.
In this case, individual owners might have to pay taxes on up to 47% of their income from the property.
“For a business that bought a property with a positive cash flow, this figure is much lower. Capping at a maximum of around 27.5%”
This could make a sizable difference to your overall earnings.
Profit Distribution for Tax Savings
In some circumstances, buying a property through your business may enable you to distribute profits to family members or your partner, to lower the value of the tax payments you are required to make.
Several caveats and provisions that affect the degree to which you can do this. However, if you talk with your accountant, you might be able to devise an arrangement where you can share assets and high-income earnings with a family member who has a lower income.
This, in turn, puts you in a lower tax threshold, which results in you being required to pay less.
Limited Liability
Another benefit to purchasing property on behalf of your company is that you will retain limited liability if your company starts to struggle financially.
Should your company run into debt, you will only be liable for the sum of money you personally invested.
This gives many investors terrific peace of mind, as they know that should anything not go to plan, creditors will not be able to touch their personal assets.
Thus, ensuring their private home and investments stay separate from that of the company and remain completely safe.
Cons of Buying Property Through a Company
As well as the benefits outlined above, there are also some things to be mindful of when purchasing property through a company.
These include:
| Cons | Description |
|---|---|
| Loan Challenges | Harder to secure loans for companies |
| Higher Banking Costs | Business banking often has higher fees |
Getting a loan for a company is often harder than for an individual.
When you ask for a loan as a company, the bank will usually direct you to a business banker who often charges higher fees and interest rates. This is the case even though buying property is similar whether you do it as an individual or as a company.
Let’s explore these cons in more detail.
Capital Gains Tax Without Business Use
If you use your property for business, you might get a 50% cut on capital gains tax from the ATO, or you might not have to pay it at all.
But if you don’t use it for business, you’ll have to pay the full tax. This can be a lot and may affect how good your investment seems.
For example, if you sell your property and earn a $500k profit, you’ll need to pay tax on all that profit. But with a business discount, you’d only pay tax on $250k.
Increased Tax Return Costs
Unfortunately, when buying a property on behalf of your business, you will be subjected to higher costs in terms of company tax returns as compared to personal ones.
Throughout the year, should you spend any money accrued from the profits your property makes, you will be required to pay tax on the dividends.
This might seem nominal, but it does add up over 12 months, so it is something you should be mindful of come tax time when it comes to your earnings assessment.
More on buying a property through a company
Choosing the Right Company Name
When it comes to buying property through a limited company, the company name plays a vital role. Ensuring that the company name reflects the nature of the investment can aid in establishing a strong brand identity.
Role of Mortgage Brokers
A mortgage broker, like Soho Home Loans, can be invaluable when you’re looking to purchase a property through your company.
They can guide you on the nuances of securing a loan in a company name as opposed to borrowing in an individual’s name. The intricacies of borrowing as a company can be different from buying as an individual.
Navigating Tax Challenges
One of the main challenges of owning property through a company is understanding the tax implications.
While there are tax incentives for purchasing residential property as an individual, buying property through a limited company brings its own set of benefits and challenges.
These include possible advantages related to CGT (Capital Gains Tax) discounts, known as cgt discount, and potential drawbacks related to inheritance tax and corporation tax on your profits.
Importance of Legal Agreements
When buying property in a joint venture or with a partner, it’s crucial to have an agreement in place. This ensures clarity about the ownership of the property and roles of the company directors.
An understanding between directors of the company can prevent potential conflicts in the future.
Trust Structures vs. Company Structures
For those who are torn between setting up a company or a trust for purchasing property, it’s essential to understand the benefits of each.
Trust structures can offer a different level of flexibility and protection compared to companies, especially when dealing with negatively geared properties. Consulting with experts or seeking advice from your accountant can provide clarity.
Stamp Duty and Other Costs
While many focus on tax rate and benefits, one shouldn’t forget other associated costs, such as stamp duty. This can vary depending on whether the property is negatively geared or if the asset has been held for an extended period.
Final Thoughts
At the end of the day, the success of a company buying a property is dependent on whether you run a business out of it. If this is something you intend to do, you’ll then need to plan everything from payment solutions such as Smartpay to strategies for growth, legal considerations, and more.
Success depends on your business planning and management and your knowledge. if you want to know How do different roles and responsibilities stack up in a corporation. Discover the full details in our company strata article.
Remember, there are risks and benefits. Consult a business finance accountant for advice tailored to your situation.
Deep dive: Ready to take a deep dive into stratum titles? Don’t miss our in-depth article on Stratum Title Meaning.
FAQs on ‘The Pros and Cons of Buying a Property Through a Company’
Is it better to buy property under a company?
Buying property under a company can be advantageous for asset protection and tax benefits, especially for commercial properties or rental investments.
However, it may not be ideal for personal residences due to potential loss of CGT exemptions and challenges in financing.
Should I buy an investment property in a company name?
Investment properties purchased under a company name can offer benefits like lower capital gains taxes and income distribution flexibility.
But, it might not be suitable for everyone, particularly if the property is used as a personal residence, due to the loss of certain tax exemptions.
Can I use money from my business to buy a house?
Using business funds to buy a house is feasible, particularly if it’s a commercial property related to your business. However, it’s more complex for personal residences and typically requires a business loan specifically for commercial purposes.
Should I put my investment property in a trust?
Putting an investment property in a trust can enhance asset protection and provide flexibility in income and capital gains distribution. However, it also introduces additional complexities like setup costs and ongoing management requirements.
